Before demonetisation caught us off guard in 2016, we were happy with cash transactions, especially the small and medium business units. Other than cash, cheques or credit cards (which also invited service charges) were not popular. Demonetisation also exposed the fact that many did not have a bank account.

According to a report by the World Bank based on Findex data, close to one-third adults, about 1.7 billion, are unbanked. As a silver lining to the grim statistics, we are making significant progress that is slow yet effective. On a global scale, 1.2 billion adults now have access to an account since 2011.

Back at home, India’s Pradhan Mantri Jan DhanYojana (PMJDY, translation: Prime Minister's People's Wealth Scheme) led to opening of over 318 million bank accounts and over ₹792 billion were deposited under the scheme in a span of four years. The next step (or in the Indian context, a step ahead of demonetisation) in this regard was to make banking and digital payments accessible, which paved the way for Open Banking or Unified Payment Interface (UPI) in India that was launched in April, 2016.

What is open banking?

Open Banking or Open Bank Data grants access to consumer data from banks to third-party financial service providers through Application Programming Interfaces (APIs). The banking sector had always been a closed business, being wary of sharing data with anyone.

One of the recent innovations in the banking sector, open banking uses third party service providers that are tech start-ups and financial service vendors. Customers need to provide consent to access their data for financial transactions through an application. These service providers can then use the data to analyze and provide customized services.

Financial Inclusion is the key to Development

Financial inclusion means providing access to everyone from all walks of life to a bank account and using it for various benefits offered to the citizens, for example a government scheme that needs the people to have bank accounts. Government-run programs will, thus, be run with utmost transparency and bring the target group (below the poverty line citizens) to the mainstream.

According to the Open Banking and Inclusive Growth in India report of April’20, the National Payment Corporation of India (NPCI) facilitates many initiatives including the launching of RuPay based on debit cards that are linked to PMJDY accounts. PMJDY is a no-frills account opened for the citizens of India, aiming to extend affordable access to financial services such as bank accounts, remittances, credit, insurance and pension. Despite these promotional schemes, more than one third of the population of India still has no access to the banking system.

The emergence of Modern Banking System

The shift from the branch-based banking system in India, which was paper-based book-keeping to core-banking solutions in 2002, was a precursor for the modern banking system according to a report published in 2018 by PWC, The changing face of banking. This move helped banks invest in modern technological solutions and focus on zero-downtime while enabling a seamless customer experience.

4 ways the Open Banking System can be a catalyst for widespread financial inclusion

1.Credit Preferences

Indians believe in the joint family system rather than the nuclear one, having reserves pooled for the members and where members borrowed from within the family. With a growing awareness around bank loans, there was a wider acceptance of bank loans. Financial institutions designed tailor-made loans for customers, right from personal loans to buying consumer goods via credit cards on easy EMI. It empowered young professionals with financial independence, giving a boost to the economy.

Aided with an open banking system, the earning population can keep track of their credit scores and even compare financial products, leading to enhanced financial literacy. By enabling data sharing, the underbanked population can build a financial profile and a transaction history that will eventually support transactions with other banks, FinTechs or microfinance institutions. Via Open banking, consumers can understand their own risk profile when applying for loans. Thus, more data and more loans equate to more people and more business.

2.Digital Payments support SMEs

The pandemic increased digital transactions manifold, as people were forced to be indoors. Consumers ordered essentials online to be delivered contactlessly. According to a McKinsey report, more than 60% of global consumers shifted their attention to e-commerce platforms.

This brought many smaller brands to the same e-commerce platforms that the big brands used to dominate. Several brands collaborated with local artisans and helped them set up bank accounts enabling them with digital payment options. Thus, open banking will empower micro, small and medium companies with a pool of relevant tools and services targeting individual needs such as cash flow management and accounting software.

3.Financial Literacy through Open Banking System

Third-party service providers can spread awareness and help the financially weaker section in a great way. They can offer loan alternatives and help the poorest from loan sharks. Many saving schemes could be announced to help them build their credit effectively. Open Banking need not be treated as just a marketing tool, but a collaborative tool to support the underprivileged and downtrodden.

A solution that open banking could bring in this regard is to offer mobile-based applications that help with income management. These solutions need to be built such that someone with basic education and know-how of using a mobile device can access them. A good response in this field has been observed after the introduction of gamification to explain simple concepts and incentivising people to maximise the use of their accounts. A simple push-notification in the regional language with the directive to save regularly can also go a long way to ensure wider adoption of best practices.

4.Banking the gig economy

The pandemic also has increased the gig work among independent workers, through food and consumer goods delivery chain apps. The disadvantage of the gig economy is that the workers could earn money only through salary, with no extra employment benefits. According to a TOI report, between October’18 and March’19, there were 5.6 lakh openings in the Delhi-NCR region. This had bridged the unemployment gap slightly, so the gig economy is not all that bad for the Indian employment scenario.

When partial lockdown was imposed, many restaurants started using this workforce for delivering food, and this sector continues to boom and is here to stay. Also, many e-commerce platforms employed them to deliver packages. Via open banking, gig-economy platforms or employers can offer insurance schemes or nano-loans to give the missing stability to them. It would give the workforce a boost in the right direction. This model is already in the pipeline for BBVA Bancomer that is experimenting with Uber in Mexico, and implemented at Grab in South-East Asia for some time now.

In Conclusion

The financial sector earlier did not support NBFCs and other small lenders till the late 2000s; now the industry has opened up to small finance companies. Also, the RBI is laying out regulations to bring down the Non-Performing Assets plaguing the banking sector. With many new technologies in fintech like Artificial Intelligence in the anvil, open banking will provide the much-needed major thrust for both the banking sector and customers.